Regulation and Rate Setting by Virginia State Corporation Commission (SCC)
The presentation outlines the authority of the SCC in regulating rates and services of utility companies in Virginia. It discusses the legislative framework, rate-setting processes, and the SCC's role as an economic regulator for electric, gas, water, and wastewater utilities.
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SCC PRESENTATION TO ENERGY SUMMIT Wednesday, July 19, 2023 1
SCC's Authority Article IX of Virginia Constitution: Establishes the SCC as a permanent Commission. SCC given duty to regulate the rates, charges, services and facilities of railroad, telephone, gas, and electric companies. SCC has other powers and duties as may be prescribed by law. Title 12.1. State Corporation Commission Legislative implementation of Article IX. Describes powers and duties in more detail, e.g., Commission procedures, subordinate employees, appeals, etc. Title 56 Public Service Companies. Chapter 10 traditional utility ratemaking provisions. Chapter 23 includes hybrid utility ratemaking provisions for investor-owned utilities established in 2007 legislation. 2
SCC Authority - Utilities SCC is an economic regulator Sets rates for electric, natural gas, water and wastewater utilities Does not set rates for municipal or federal entities All reasonable and prudent costs of providing utility service are paid for by customers This includes financing costs (debt and profit margin) 3
Types of Electric Rate Proceedings Fuel Factor recovery of fuel costs dollar-for- dollar with no profit component Rate Adjustment Clauses recovery of a specific component of cost of service, on a dollar-for-dollar basis. Base rates opportunity to recover the rest of cost of service 4
Rate Application Process Rate application is filed by utility The SCC sets up a procedural schedule for each case. The Company is instructed to provide notice to the public concerning the potential change in customer rates and the resulting bills Parties to the case and staff conduct reviews and/or audits. The results are incorporated into prefiled written testimony. 5
Rate Application Process Hearings are either conducted by hearing examiners or the Commissioners. Parties and public witnesses provide oral testimony. A full evidentiary record is established through public witness testimony, prefiled testimony of the parties, live testimony at the hearing, and legal briefs Commission makes its findings based on the evidence in the case Based on the SCC's final order, new rates are established 6
Dominion Energy Virginia Typical Residential Rates 7/19/23 Typical Residential Rates 7/19/23 Dominion Energy Virginia Current Residential Bill Proposed Increase if Pending Proposed Bill Requested Eff. Date Base Rates Base $ 70.63 $ - $ 70.63 - Fuel Factor Fuel $ 28.59 $ - $ 28.59 - Rider T1* Transmission $ 3.21 $ 2.67 $ 5.88 9/1/23 Rider R Bear Garden Gas CC $ - $ - $ - - Rider W Warren Gas CC $ - $ - $ - - Rider BW Brunswick Gas CC $ 2.80 $ - $ 2.80 - Rider GV Greensville Gas CC $ 2.75 $ - $ 2.75 - Rider S VCHEC $ - $ - $ - - Rider B Biomass $ 0.63 $ - $ 0.63 - Rider US-2 Solar $ 0.22 $ (0.05) $ 0.17 9/1/23 Rider US-3 Solar $ 0.75 $ - $ 0.75 - Rider US-4 Solar $ 0.31 $ - $ 0.31 - Rider CE Solar $ 1.70 $ - $ 1.70 - Rider SNA Nuclear Relicensing $ 2.07 $ (1.14) $ 0.93 9/1/23 Rider RPS RECs $ 1.81 $ (0.28) $ 1.53 9/1/23 Rider RGGI RGGI $ - $ 4.64 $ 4.64 9/1/23 Rider OSW Offshore Wind $ 1.45 $ 3.29 $ 4.74 9/1/23 Rider PPA Renewable PPAs $ (0.07) $ (0.22) $ (0.29) 9/1/23 Riders C1A/C2A/etc. Energy Efficiency $ 1.60 $ 0.24 $ 1.84 9/1/23 Rider U Strategic Undergrounding $ 1.99 $ - $ 1.99 - Rider GT Grid Transformation $ 0.28 $ - $ 0.28 - Rider E Coal Ash $ 1.95 $ 0.08 $ 2.03 11/1/23 Rider CCR Coal Ash $ 2.96 $ (0.58) $ 2.38 12/1/23 Rider RBB Rural Broadband $ 0.17 $ - $ 0.17 - PIPP USF PIPP $ 0.03 $ 0.73 $ 0.76 11/1/23 Rider VCR Voluntary Credit Rider $ (0.47) $ - $ (0.47) - 7 Total $ 125.36 $ 9.38 $ 134.74 * DEV recovers $9.70 per month in base rates for transmission in addition to the Rider T1 RAC.
APCo Typical Residential Rates 7/19/23 Proposed Increase if Pending Current Residential Bill Requested Eff. Date Appalachian Power Company Proposed Bill Base Rates Base $ 68.01 $ 25.03 $ 93.04 1/1/24 Triennial Remand Rider Base $ 3.31 $ - $ 3.31 - Fuel Factor Fuel $ 43.19 $ - $ 43.19 - PIPP USF PIPP $ 0.04 $ - $ 0.04 - T-RAC Transmission $ 34.43 $ 4.15 $ 38.58 9/1/23 G-RAC Dresden Gas CC $ 2.55 $ 0.66 $ 3.21 11/1/23 EE-RAC Energy Efficiency $ 1.43 $ - $ 1.43 - DR-RAC Demand Response $ 0.22 $ - $ 0.22 - E-RAC Coal Ash $ 2.84 $ - $ 2.84 - BC-RAC Rural Broadband $ (0.18) $ - $ (0.18) - RPS-RAC (legacy) Voluntary RPS $ (0.58) $ (0.58) - Rider A.5 RPS VCEA $ 2.00 $ (0.60) $ 1.40 10/1/23 Rider A.5 PCAP VCEA $ 0.35 $ (0.09) $ 0.26 10/1/23 Rider A.6 RPS VCEA $ 0.02 $ 0.03 $ 0.05 10/1/23 8 Total $ 157.63 $ 29.18 $ 186.81
Relevant Terms Capital Structure The composition of a utility s financing sources, primarily the mix of debt and equity. Certificate of Public Convenience and Necessity - Generally issued for electric generation facilities, electric transmission facilities and natural gas facilities. Required pursuant to Virginia Code Section 56-265.2. Cost of Capital A utility s overall cost of financing, considering all sources. Aka cost of money. Cost of Equity A utility s cost of equity financing. Also known as profit margin. Cost of Service Cost of providing utility service to customers. Includes recovery of the following: operating expenses, capital expenditures and financing costs (including profit margin). Depreciation The allocation of a capital investment over that investment s useful life. The means by which that investment is recovered. Earnings Test Measures earnings of utility over a 13-month historic period. 9
Relevant Terms - continued In the public interest Not specifically defined in the Code of Virginia but the meaning is typically derived from the context in specific code sections. Rate Base The amount of investment a utility has made but not yet recovered from customers. The amount a utility finances and thus have an opportunity to earn its cost of capital on. Rate of Return The authorized rate of return is the approved cost of capital. The earned rate of return is the return actually earned in a historical period. Return on Equity (ROE) - The authorized ROE is the approved cost of capital. The earned ROE is the return actually earned in a historical period. Securitization The process of converting debt (or illiquid assets) into securities (bonds), which are then bought and sold in the financial markets. Tracker (also Rate Adjustment Clause or Rider) A rate mechanism separate from base rates. Typically used for single-issue costs. Reduces regulatory lag, but shifts risks to customers. 10
Regulation of Investor-Owned Electric Companies Since 2007 Rate Reviews: Initially Biennial Reviews and most recently Triennial Reviews for base rates Ability to adjust base rates was dependent on historic earnings results (Earnings Test) Customers could receive refunds from historic overearnings however, utility had ability to offset customer refunds by qualified investments Return on Equity SCC determination of return on equity was subject to use of peer group floor and ceiling pursuant to Virginia Code Section 56-585.1 A2. Rate Adjustment Clauses Single issue rate cases for certain utility projects (i.e. generation units, transmission costs, demand side management programs) Fuel costs recovered through fuel factor on a dollar-for-dollar basis (no profit margin) 11
Regulation of Investor-Owned Electric Companies as of July 1, 2023 Rates Reviews: Return to Biennial Reviews for base rates DEV in odd years and APCo in even years Ability to adjust base rates no longer dependent on historic earnings results (Earnings Test) Customers could receive refunds from historic overearnings utility no longer has ability to offset customer refunds by qualified investments Return on Equity SCC may determine return on equity using any reasonable methodology. Rate Adjustment Clauses Single issue rate cases for certain utility projects (i.e. generation units, transmission costs, demand side management programs) Fuel costs recovered through fuel factor on a dollar-for-dollar basis (no profit margin) Securitization provision for deferred fuel costs 12
HB1770/SB1265 Dominion Energy Virginia (DEV) Biennial Reviews Securitization Only available for Fuel Underrecovery Application must be filed by July 1, 2024 (was filed July 3, 2023) Final Order must be issued within 4 months of application Formula Rate Mechanism will be determined for annual filing Fuel Securitization charge must be identified on customer bills 13
Additional HB1770/SB1265 Provisions Sets rates for two 12-month rate years As of July 1, 2023 must roll in $350 million of RAC revenues into base rates This will reduce a typical customer bill between $7-$8/month DEV has filed to combine Riders S, W and R into base rates Roll in shall not serve as basis for rate increase in 2023 Biennial Review Commission may consolidate existing RACs 56-585.1 A8 period cost provision changes Can still defer to 70 basis points (bp) below fair rate of return: asset impairments, AMRs, costs to comply with state/federal laws and natural disasters Can defer severe weather costs to fair rate of return Rest of A8 no longer applicable (Customer Credit Reinvestment Offsets) 14
Additional HB1770/SB1265 Provisions New A9 Provisions 2023 Biennial Review Provisions 70 BP collar still in effect for earnings test Sharing above collar is 85% customers/15% shareholders Beginning 2025 Biennial Review Provisions No collar in earnings test Sharing above fair rate of return is 85% customers/15% shareholders No sharing above 150 bp of fair rate of return (100% customers) 15
Additional HB1770/SB1265 Provisions ROE and Equity Ratio 9.7% ROE for 2023 Biennial Review based on simple average of Florida, Georgia, Texas, Tennessee, West Virginia, Kentucky and North Carolina Beginning 2025 Biennial Review SCC may use any methodology to determine ROE Dominion must make reasonable effort to maintain common equity ratio of at least 52.10% Before December 31, 2023, SCC must initiate proceeding to determine protocols and standards for performance-based adjustments to ROE Performance-based adjustments to ROE shall apply beginning with 2025 Biennial Review or 2027 Biennial Review if SCC determines later date is in the public interest 16
HB1777/SB1075 Appalachian Power Company (APCo) Biennial Reviews Securitization Only available for Fuel Underrecovery Application must be filed by July 1, 2024 Final Order must be issued within 4 months of application Formula Rate Mechanism will be determined for annual filing Fuel Securitization charge must be identified on customer bill 17
Additional HB1777/SB1075 Provisions Going-forward Rates Commission may consolidate existing RACs New 56-585.8 Biennial Reviews Applies only to APCo (Phase I utility) Biennial reviews begin March 31, 2024 (First one is only one year) Other provisions of 56-585.1 no longer apply ( 56-585.8 B) Final Order shall be issued by November 20th 18
Additional HB1777/SB1075 Provisions Going-forward Rates Rates set for the rate year commencing the year after the Biennial Review (i.e. 2025 rate year for 2024 BR) Use actual end of period capital structure unless it is unreasonable State and Federal taxes calculated on stand-alone basis Before December 31, 2023, SCC must initiate proceeding to determine protocols and standards for performance-based adjustments to ROE Performance-based adjustments to ROE shall apply beginning with 2025 Biennial Review or 2027 Biennial Review if SCC determines later date is in the public interest 19
Additional HB1777/SB1075 Provisions Earnings Test Provisions Collar for Earnings Test is 100 bp earnings within the collar are neither excessive or insufficient Customers receive 100% of earnings above collar Can defer severe weather costs and natural disaster costs to top of the collar Debt associated with securitized bonds is excluded from capital structure 20
Certificates of Public Convenience & Necessity Generally issued for: o Electric Generation Facilities o Electric Transmission Facilities o Natural Gas Facilities Commission proceeding: o Public notice o Opportunity for public comments o Opportunity for participation as a respondent in the proceeding o Evidentiary hearing o Opportunity for company rebuttals o Commission Final Order & CPCN 21
Recurring Legislative Reports Date Report Title Frequency October 1 Energy Efficiency Programs Annually November 1 CEUR Report Annually December 1 Grid Modernization /Reliability/ Integration of Renewables Annually November 1 Assessment Rates and Terms Every 5 Years After Triennial Review Qualifying Investment Report APCo and DEV December 31 American Rescue Plan Act Annually through 2023 22
Recent Legislative Reports Report Title Lifecycle of Renewable Energy Facilities (HB774/SB 499, 2022) HB 2332 Data Access and Privacy Stakeholder Report (HB 2332, 2019) Virginia Energy Storage Task Force Report (HB 1183, 2020) Virginia Transportation Electrification Stakeholder Report (HB 2282, 2021) Shared Solar for APCo and ODP Stakeholder Report (SB 660, 2022) Staff Letter Study on Utility Disconnections (2022) 23
